347 Linden LLC

Filing 16

MEMORANDUM AND ORDER. For the reasons set forth in the attached Memorandum and Order, debtor's motion is dismissed and the court's previous order staying the foreclosure sale is vacated. Ordered by Judge Kiyo A. Matsumoto on 6/8/2011. (Zeehandelaar, Rachel)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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IN RE 347 LINDEN LLC

MEMORANDUM & ORDER
11-CV-1990 (KAM)

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MATSUMOTO, UNITED STATES DISTRICT JUDGE:
On April 22, 2011, 347 Linden LLC (“347 Linden,”
“Debtor,” or “Appellant”) brought an “Emergency Order to Show
Cause with Temporary Restraints” to this court, requesting
that the court order Federal National Mortgage Association
(“Fannie Mae,” or “Appellee”) to show cause why an order
should not be entered (1) staying two March 8, 2011 orders by
the United States Bankruptcy Court, Eastern District of New
York (Rosenthal, J.) granting relief from a stay and
dismissing 347 Linden’s chapter 11 petition, and (2) staying a
foreclosure sale of the property known as 347 Linden Street,
Brooklyn, New York 11237, Block 3328, Lot 47 (the “Property”).
Fannie Mae opposes debtor’s emergency application.

On April

22, 2011, the court denied debtor’s application to stay the
foreclosure sale unless debtor posted a $100,000 bond by April
27, 2011.

Debtor posted the bond on April 27, 2011 and the

court stayed the sale, pending briefing on the instant motion.
For the reasons set forth below, the debtor’s request for a
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stay of the bankruptcy court’s orders and of the foreclosure
sale is denied.

BACKGROUND
I.

Facts
Debtor is a New York limited liability company.

(ECF No. 1, [Debtor’s] Emergency Order to Show Cause with
Temporary Restraints (“Debtor Pet.”), Ex. C, Motion of Federal
National Mortgage Association for Entry of an Order (A)
Dismissing Chapter 11 Case; or Alternatively, (B) Modifying
Automatic Stay (the “Lift Stay Motion”), at ¶ 9.)

Debtor’s

sole asset is a multi-apartment property with two commercial
units in Brooklyn, New York.

(ECF No. 9, [Fannie Mae’s]

Memorandum of Law in Opposition to Appellant’s Emergency
Application for a Stay of the Bankruptcy Court’s Orders
Granting Relief from Stay and Dismissing the Chapter 11
Bankruptcy Case and a Stay of the Foreclosure Sale for
Property Known as 347 Linden Street, Brooklyn, New York
(“Fannie Mae Opp.”) at 5.)
On or about August 12, 2005, debtor executed a note
to Greystone Servicing Corporation, Inc. (“Greystone”) in the
aggregate principal amount of $1,364,000.00, which was secured
by, inter alia, a Mortgage, Security Agreement, Assignment of
Leases and Rents, and Fixture Filing (the “Mortgage”).
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(Lift

Stay Motion at ¶ 10.)

In addition, Abraham Hoffman (the

“Guarantor”), a principal of 347 Linden, executed a guaranty
of the Note in favor of Greystone.

(Id.)

Also on August 12,

2005, Greystone entered into an “Assignment of Multifamily
Mortgage, Assignment of Rents and Security Agreement Loan”
with Fannie Mae in which it assigned to Fannie Mae all of its
rights, title, and interest in the Note, Mortgage and all
other documents that evidenced or secured the obligations
under the Note.

(Id. at ¶ 11.)

Under the terms of the

Mortgage, debtor granted to Fannie Mae a security interest
“under the Uniform Commercial Code for any of the Mortgaged
Property which, under applicable law, may be subject to a
security interest under the Uniform Commercial Code, whether
acquired now or in the future, and all products and cash and
non-cash proceeds thereof . . . .”

(Id. at ¶ 12.)

The debtor failed to make timely monthly mortgage
payments, which resulted in the assessment of default interest
and late charges.

(Lift Stay Motion at ¶ 13.)

According to

Fannie Mae, the debtor further breached the terms of the
mortgage by, inter alia, granting a mortgage on the Property,
dated June 8, 2005, to Investor Mortgage Corporation, to
secure indebtedness in the amount of $3,434,065.05.
¶ 14.)

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(Id. at

On July 31, 2008, Fannie Mae initiated a foreclosure
action in New York state court against the debtor and Mr.
Hoffman, seeking to foreclose on the Property.
Motion at ¶ 15; Fannie Mae Opp. at 4-5.)

(Lift Stay

Fannie Mae filed a

motion for summary judgment in state court, but in March 2009,
debtor entered into a forbearance agreement with Fannie Mae,
pursuant to which Fannie Mae agreed to discharge a courtappointed receiver and reinstate the loan in exchange for
debtor’s resumption of mortgage payments.
5.)

(Fannie Mae Opp. at

In exchange, debtor agreed to consent to summary judgment

in the foreclosure action and to the appointment of a referee,
as well as to stipulate to the entry of judgment of
foreclosure based upon the report of the referee.
Motion at ¶ 16.)

(Lift Stay

The state court granted Fannie Mae’s summary

judgment motion on March 18, 2009, on the condition that an
order appointing a referee be settled on notice.
¶ 19.)

(Id. at

On May 14, 2009, the state court entered an order

appointing a referee to compute the amount due to Fannie Mae
under the loan and to examine and report whether the Property
could be sold in parcels.

(Id. at ¶ 20.)

On July 1 and August 1, 2009, debtor failed to make
the payments required under the loan.
Lift Stay Motion at ¶ 21.)

(Fannie Mae Opp. at 5;

On October 29, 2009, the referee

issued his report, indicating that a sum of $1,402,336.97 was
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due as of October 29, 2009, and that the Property should be
sold in one parcel.

(Lift Stay Motion at ¶ 23.)

On September 28, 2010, the state court entered a
judgment of foreclosure and sale against the debtor.
Mae Opp. at 5; Lift Stay Motion at ¶ 24.)

(Fannie

Pursuant to the

judgment, the referee was ordered to hold an auction to sell
the Property to the highest bidder.
¶ 24.)

(Lift Stay Motion at

On October 6, 2010, Fannie Mae informed debtor that

the referee would be holding the auction on November 4, 2010
at 3:00 p.m.
II.

(Lift Stay Motion at ¶ 25.)

Procedural History
On November 3, 2010, the day before the scheduled

sale of the Property, debtor filed a petition for
reorganization under Chapter 11 of Title 11 of the United
States Code, 11 U.S.C. § 101 et seq. (the “Bankruptcy Code”),
in the United States Bankruptcy Court for the Eastern District
of New York.

(Fannie Mae Opp. at 5; Debtor Pet. at ¶ 24.)

On January 14, 2011, Fannie Mae filed a motion for
entry of an order (a) dismissing the Chapter 11 petition; or
(b) modifying the automatic stay.
Debtor Pet. at ¶ 35.)1

(Fannie Mae Opp. at 5;

Debtor objected to the motion on

February 16, 2011 and filed an Amended Disclosure Statement

1

Fannie Mae thereafter withdrew the portion of its motion seeking
dismissal. (Fannie Mae Opp. at 5 n.2; Debtor Pet. at ¶ 53.)

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and Amended Plan of Reorganization on March 7, 2011.

(Fannie

Mae Opp. at 5; Debtor Pet. at ¶¶ 43, 57.)
On March 8, 2011, the bankruptcy court heard
argument on Fannie Mae’s motion.

(Fannie Mae Opp. at 5;

Debtor Pet. at ¶ 61.)

Debtor did not request to call any

witnesses to testify.

(Fannie Mae Opp. at 11.)

On the same

day, the bankruptcy court granted Fannie Mae’s motion
requesting relief from the automatic stay, based on the
court’s findings that there was cause for lifting the stay,
that there was no equity in the property, and that an
effective reorganization plan was not possible.
Opp. at 11-13; Debtor Pet. at ¶¶ 71, 72.)

(Fannie Mae

The bankruptcy

court also dismissed the petition sua sponte, on the ground
that debtor had failed to comply with the U.S. Trustee’s
requests for information and documents, and because there was
no reasonable prospect of reorganization.
12; Debtor Pet. at ¶ 73.)

(Fannie Mae Opp. at

The bankruptcy court entered a

“Lift Stay Order” and a “Dismissal Order.”

(Fannie Mae Opp.

at 12; Debtor Pet. at ¶¶ 75, 76.)
On March 22, 2011, debtor filed a notice of appeal
of the Lift Stay Order and the Dismissal Order.
Opp. at 13; Debtor Pet. at ¶ 77, 78.)

(Fannie Mae

On April 8, 2011,

Fannie Mae filed in the state court foreclosure proceeding a

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notice of sale of the property, scheduled for April 28, 2011.
(Fannie Mae Opp. at 13; Debtor Pet. at ¶ 79.)
On April 22, 2011, debtor filed the instant
petition.

The court ordered Fannie Mae to show cause why an

order should not be entered staying the bankruptcy court’s
Lift Stay Order and Dismissal Order and the foreclosure sale
of the Property.

(ECF No. 3, Emergency Order to Show Cause

with Temporary Restraints, dated April 22, 2011.)

After

hearing argument, the court agreed to stay the Lift Stay
Order, the Dismissal Order and the foreclosure sale on the
condition that debtor provide a security in the amount of
$100,000 and supporting documentation by April 27, 2011.
(Id.)

Upon debtor’s posting of the bond, the court continued

the stay pending further order of the court.
April 27, 2011.)

(Order dated

This opinion constitutes the court’s further

order.

DISCUSSION
I.

Standard of Review
A district court reviews a bankruptcy court’s

findings of fact for clear error and its conclusions of law de
novo.

In re Albert, No. 10-CV-2835, 2011 U.S. Dist. LEXIS

45371, at *4 (E.D.N.Y. Apr. 26, 2011) (citing In re Vouzianas,
259 F.3d 103, 107 (2d Cir. 2001)).
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The standard for granting

a motion to stay is the same as that for a preliminary
injunction and, thus, the movant must establish all four of
the following elements: (1) likelihood of success on the
merits of the appeal; (2) appellant will suffer irreparable
injury if the stay is denied; (3) no substantial harm will
come to appellee; and (4) that issuance of the stay would not
involve harm to the public interest.

See, e.g., In re Sphere

Holding Corp., 162 B.R. 639, 642 (E.D.N.Y. 1994); In re
Crescenzi, 58 B.R. 141, 142-43 (S.D.N.Y. 1986).
II.

The District Court’s Jurisdiction
Before the court reaches the merits of debtor’s

motion to stay the bankruptcy court orders and the foreclosure
sale, the court must determine whether it has jurisdiction to
hear debtor’s appeal.

Federal Rule of Bankruptcy Procedure

8005 (“Rule 8005”) states:
A motion for a stay of the judgment,
order, or decree of a bankruptcy judge,
for approval of a supersedeas bond, or for
other relief pending appeal must
ordinarily be presented to the bankruptcy
judge in the first instance. . . . A
motion for such relief, or for
modification or termination of relief
granted by a bankruptcy judge, may be made
to the district court or the bankruptcy
appellate panel, but the motion shall show
why the relief, modification, or
termination was not obtained from the
bankruptcy judge. The district court or
the bankruptcy appellate panel may
condition the relief it grants under this
rule on the filing of a bond or other
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appropriate security with the bankruptcy
court.
The debtor’s principal argument with respect to Rule
8005 is that, although it did not bring the motion to stay to
the bankruptcy court in the first instance, as required by the
plain language of Rule 8005, it has complied with that rule
because “the Bankruptcy Court, by its sua sponte dismissal of
the case based on what amount to mere technicalities, and for
reasons that had no bearing on whether or not the Appellant
had the ability to reorganize . . . has, in sum and substance,
indicated that it would not grant the Appellant any relief to
preserve its Property, let alone staying the Bankruptcy
Court’s Orders during the pendency of the appeals.”
Pet. at ¶ 17.)

(Debtor

Alternatively, debtor argues that “it is

axiomatic that the District Court always sits as a Court of
original jurisdiction over bankruptcy matters, and, thus, the
District Court will always have discretion to hear bankruptcy
matters . . . even assuming, arguendo, that the Appellant’s
emergency application does not comply with Rule 8005.”

(ECF

No. 14-4, Debtor-Appellant 347 Linden LLC’s Reply Memorandum
of Law in Further Support of the Appellant’s Emergency
Application for a Stay Pending Appeal of the Bankruptcy
Court’s Lift Stay Order and Dismissal Order, and a Stay of the
Foreclosure Sale of the Property (“Debtor Reply”) at 4.)

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In

response, Fannie Mae argues that Rule 8005 “require[s] that a
party seeking . . . a stay apply first to the bankruptcy
court; failure to exhaust this procedural step warrants denial
of such an application by the district court.”

(Fannie Mae

Opp. at 13.)
The court agrees with Fannie Mae that the debtor’s
proper course was to file the motion to stay with the
bankruptcy court in the first instance, rather than in this
court.

In re Zahn Farms, 206 B.R. 643, 644 (2d Cir. Bankr.

Pan. 1997) (“We are of the view that we may not consider the
merits of the request for a stay pending appeal, because by
their own admission, the Debtors have not complied with the
duty imposed by [Rule] 8005 to present the request for stay
first to the bankruptcy judge from whose order the appeal is
taken.”).2

A district court has the power to stay an order or

judgment of the bankruptcy court only if “such relief was
first sought in the bankruptcy court.”
142.

Crescenzi, 58 B.R. at

Indeed, in cases in which district courts have found

that they had jurisdiction to consider a debtor’s motion to
stay after the dismissal of a bankruptcy petition, the debtor
had first sought the desired relief before the bankruptcy
court.

See, e.g., id. (only after the bankruptcy judge denied

2

Because the clear language of Rule 8005 states that it applies to
both district courts and bankruptcy appellate panels, see Rule 8005, the
Bankruptcy Appellate Panel’s reasoning in In re Zahn Farms applies equally
to the instant case, filed in federal district court.

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a stay pending appeal, did debtor move in the district court
for a stay); Sphere Holding Corp., 162 B.R. at 641 (only after
the bankruptcy court dismissed the debtor’s chapter 11
petition and denied an order to show cause did debtor bring an
order to show cause in the district court seeking the same
relief); DCNC North Carolina I, L.L.C. v. Wachovia Bank, No.
09-cv-3775, 2009 U.S. Dist. LEXIS 93046, at *9 (E.D. Pa. Oct.
5, 2009) (only after the bankruptcy court dismissed the case
and denied the debtor’s motion for a stay pending appeal did
the debtor appeal the dismissal and move for a stay in
district court); In re Carolina Park Assocs., LLC, No. 10-cv1805, 2010 U.S. Dist. LEXIS 70933, at *3 (D.S.C. July 12,
2010) (only after the bankruptcy court dismissed the case and
denied the debtor’s motion to alter or amend the bankruptcy
court’s order did the debtor move for a stay pending appeal in
district court).
None of the cases cited by debtor convince the court
that debtor was not bound by Rule 8005 to present his
application to the bankruptcy court.

Specifically, although

debtor points out that several courts have acknowledged the
possibility that there may exist certain exceptions to Rule
8005, debtor has not presented a single case in which a
district court found that such an exception existed and
excused a debtor’s failure to first apply for a motion to stay
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in bankruptcy court.

See In re N. Plaza, LLC, 395 B.R. 113,

119 n.5 (S.D. Cal. 2008) (although the court acknowledged in
dicta that “unusual circumstances” may excuse a party from
first requesting the stay in the bankruptcy court, the court
did not have to reach the issue of what constituted such
circumstances because the debtor had presented the issue to
the bankruptcy court in the first instance); In re Alexander,
248 B.R. 478, 484 (S.D.N.Y. 2000) (dismissing the motion to
stay because the debtor had not filed it in the bankruptcy
court in the first instance).
Nor does In re SI Restructuring, Inc. et al., 542
F.3d 131, 135 (5th Cir. 2008), upon which debtor heavily
relies, provide debtor with support for the course it took.
In that case, the debtor initially moved for a stay in the
bankruptcy court and the bankruptcy judge granted a ten-day
stay.

Id.

When the debtor later moved for a second stay, it

went directly to the district court, which held that the
debtor had complied with Rule 8005 because when the bankruptcy
court granted the original ten-day stay, it was “abundantly
clear that no stay, other than a ten-day stay to allow
appellate review would be granted by the bankruptcy court.”
Id. (quotation omitted).

In SI Restructuring, the district

court had the benefit of reviewing the bankruptcy court’s
rationale in granting the initial stay.
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Here, by contrast,

there is nothing before this court to shed light on how the
bankruptcy court may have ruled on the debtor’s motion to
stay.

Accordingly, SI Restructuring is distinguishable.
Finally, debtor’s argument that 28 U.S.C. § 1334(a)

gives a district court jurisdiction to hear a motion to stay
“even assuming . . . that the Appellant’s emergency
application does not comply with Rule 8005” is incorrect.
(Debtor Reply at 4.)

Section 1334(a) states that “[e]xcept as

provided in subsection (b) of this section, the district
courts shall have original and exclusive jurisdiction of all
cases under title 11.”

28 U.S.C. § 1334(a).

Pursuant to 28

U.S.C. § 157(a), however, “[e]ach district court may provide
that any or all cases under title 11 and any or all
proceedings arising under title 11 or arising in or related to
a case under title 11 shall be referred to the bankruptcy
judges for the district.”

28 U.S.C. § 157(a).

Once a case

has been so referred, the bankruptcy court has “original and
exclusive” jurisdiction over the case and the district court
“merely retain[s] jurisdiction to hear appeals from the
bankruptcy court’s orders.”

In re Interpictures, Inc., No.

96-5116, 1997 U.S. App. LEXIS 19234, at *5 (2d Cir. July 25,
1997).    The United States District Court for the Eastern
District of New York automatically refers all cases arising
under, in, or related to a bankruptcy case under Title 11 to
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the United States Bankruptcy Court for the Eastern District of
New York.

In re Porges, 44 F.3d 159, 164 n.3 (2d Cir. 1995);

see also In re Apponline.com, Inc., 303 B.R. 723, 726
(E.D.N.Y. 2004) (“Under the authority of § 157(a), all Chapter
11 cases in this District are automatically referred to the
District’s bankruptcy judges.”).

In the instant case, the

bankruptcy court had original jurisdiction and this court
retains only appellate jurisdiction over the case.

For the

reasons set forth above, debtor’s appeal is not, therefore,
properly before this court.3
Accordingly, the court finds that pursuant to Rule
8005, it may not consider the merits of debtor’s application
to stay the bankruptcy court’s March 8, 2011 orders granting
relief from a stay and dismissing the Chapter 11 petition and
debtor’s motion is dismissed.

Moreover, this court vacates

its previous stay of the foreclosure sale.

Based upon this

3

The only case debtor cites on this point, In re Wilson, 53
B.R. 123 (D. Mont. 1985), does not support its argument that the court can
bypass Rule 8005 and rely solely on 28 U.S.C. § 1334(a) to hear debtor’s
motion. To the contrary, while that court did state that “[f]ailure to
comply with [Rule 8005] is not automatically fatal to the appeal,” in the
same paragraph, it immediately clarified that stay of a final order is not
be lightly granted and, in fact, “the Ninth Circuit Bankruptcy Appellate
Panel has held that an appellate panel (or a district court sitting as
such), by generally staying enforcement of a bankruptcy court judgment
pending appeal, departs from fundamental principles of appellate review and
unnecessarily assumes responsibilities ordinarily reserved to the trial
court.” Id. at 124. Moreover, the court denied the stay of execution in
part, based upon debtor’s failure to offer an explanation for proceeding
“improperly in requesting a stay from this Court without first seeking such
an order from the Bankruptcy Court.” Id.

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ruling, the court need not consider the other arguments raised
by the parties.

SO ORDERED.

Dated: June 8, 2011
Brooklyn, New York

___________/s/______
KIYO A. MATSUMOTO
United States District Judge
Eastern District of New York

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